After all of the big tech companies reported earnings, it's obvious that Apple (AAPL 0.96%) is the odd man out in the group. While there are multiple reasons for this, one clear one is that Apple hasn't embraced or launched new products catering to the artificial intelligence (AI) trend.
Instead, Apple's business remained fairly stagnant, relying on consumers to purchase its products. Is this strategy good enough in an AI-powered world? Or do shareholders have something to worry about?
Apple's growth has been much slower than its peers
In terms of revenue growth, Apple has lagged behind its big tech peers for some time.
GOOGL Revenue (Quarterly YOY Growth) data by YCharts
With revenue increasing just 2% in the quarter, it's barely growing. However, this is an improvement, as Apple reported negative revenue growth in the previous four quarters. In the first quarter of the 2024 fiscal year (ended Dec. 30), iPhone sales (which make up nearly 60% of Apple's total revenue) rose 5.9%. While this is an improvement over previous quarters, growing revenue at nearly a 6% pace for a flagship product isn't conducive to having a stock that can beat the market.
However, the rise of its services division might be able to help Apple out. Its services segment includes Apple's advertising, cloud services, digital content (like AppleTV+ and Apple Music), and App Store revenue. Compared to its hardware divisions, this part of the business did much better in Q1.
| Metric | Services | Hardware |
|---|---|---|
| Revenue Growth | 11% | 0.05% |
| Gross Margin | 73% | 39% |
Data source: Apple.
With nearly double the gross margin of its hardware business, Apple's service division is vital to the Apple investment thesis.
With a higher-margin business growing faster than the rest of the businesses, Apple's profits should increase faster than revenue. Combined with its operating expenses hardly increasing (up 1.1%), Apple's earnings per share rose from $1.89 to $2.19 -- a 16% increase.
That's strong growth, but it still pales in comparison to how some other companies did in Q4 (although Amazon heavily skews this chart).
GOOGL EPS Basic (Quarterly YOY Growth) data by YCharts
AI isn't a part of the Apple investment thesis... yet
While these other companies are just starting to see the effects of their AI products on their balance sheet, it's a vital part of the investing thesis moving forward. Apple doesn't have that, and it's relying on three things to push it forward:
- Continual upgrades to existing products.
- Growth of its services division.
- A successful launch of its Apple Vision Pro headset.
While that's not a terrible strategy, we've already seen the first part of its stumble as the consumer gets crunched for cash. The second point has worked out phenomenally, but it isn't enough to outweigh the struggles of the continual upgrades. The third point is unknown, but the $3,500 starting price presents a significant entry barrier that may be difficult to overcome.
If Apple could add a fourth segment that includes AI integration into its products, it may be enough to propel Apple back into a conversation as one of the top tech companies. But right now, it's getting left in the dust.
However, for investors to think Apple is asleep at the wheel is probably unwise. Apple is known for not getting involved in trendy issues and only launches well-thought-out and fully developed products. So, Apple may be working on how it wants to integrate AI right now, but investors are in the dark.
NASDAQ: AAPL
Key Data Points
Until then, Apple is a highly overpriced stock (29 times earnings) for the growth it's putting up.
With other companies growing faster, having a better AI strategy, and a cheaper stock price, I'd rather purchase those than Apple. However, all of this could change with the right product announcements or a turnaround of its core business.
